LOS ANGELES, Feb. 21  Just three
months ago, Edward P. Croak, a top Wells Fargo auditing official,
wrote in Pacific Banker & Business magazine that the bank
was in an "enviable position" in the banking community
because of its success in controlling embezzlement and fraud.
But this month the bank filed a civil
suit charging that a group of boxing promoters and two former
bank employees had defrauded it of more than $21 million. Bankers
and law enforcement officials say that full details are not yet
known but that the evidence suggests a classic case of the dangers
in the increasing use of computers in banking and in the proliferation
of bank branches.
If the charges prove true, the theft
would be one of the biggest embezzlement or fraud cases in American
banking history. No criminal charges have yet been filed. The
Federal Bureau of Investigation and the Comptroller of the Currency
have been called into the case, and intensive internal audits
are continuing.
Wells Fargo officials decline to talk
now about their banking procedures or controls. Nor have they
explained in the lawsuits or elsewhere how the alleged embezzling,
which continued undetected for at least two years, was carried
out.
But bankers and law enforcement officials
familiar with the case say that a key aspect of the alleged scheme
was the ability to take advantage of a built-in delay in the
bank's computerized record of transactions between its 343 branches,
called the settlement process. This vulnerability has also led
bank and Federal officials to examine the adequacy of Wells Fargo's
internal controls, which were circumvented despite four levels
of review.
In some respects, the officials say,
the case illustrates, in almost textbook fashion, the axiom that
any well-placed employee can evade the most sophisticated controls
and security.
In other respects, according to the officials,
the case demonstrates that the potential for fraud has increased
significantly as a result of the two developments, widespread
electronic bookkeeping, and the proliferation of branch offices,
sometimes nationwide. The larger a bank's operations  Wells
Fargo handles several million transactions a day  the greater
its vulnerability to fraud, especially when computers are involved,
these experts say.
This is also true of individual accounts,
and the alleged fraud was made easier, the officials said, by
large legitimate transactions flowing through the accounts in
question.
Wells Fargo's settlement process, according
to bank and law enforcement officials, was vulnerable in part
because of the delay between the computer's recording of deposits
and withdrawals and the arrival a few days later of the paper
documenting the transaction.

Appearance of Legitimacy

The officials gave a simplified example
of one type of "roll-over" scheme: The computer would
be told to record a fictitious $1,000 deposit at one branch,
and would instantly credit it to the depositor's account in another
branch. The computer is programmed to wait several days for the
arrival of the deposit slip before sounding an alarm. In that
period, another fictitious $1,000 deposit would be made in another
account, creating the source for apparently legitimate documentation,
a check, for example, for the first deposit. This would allow
the first deposit to be cleared through the system, although
the check was written against a fictitious deposit itself. A
chain of apparent deposits would follow, each covering the previous
one and making all the deposits appear to be legitimate, so that
funds were available for withdrawal from the bank.
The case has attracted wide attention,
often being portrayed as a boxing scandal because of the involvement
of enterprises bearing the name of Muhammad Ali, who has not
been implicated.
In its suit the bank named as defendants
Muhammad Ali Professional Sports Inc., or MAPs, and Muhammad
Ali Amateur Sports Inc., or Maas, as well as several principals
in those corporations, including the boxing promoter Harold J.
Smith.

Length of Alleged Fraud Unusual

But to bankers and law enforcement
officials the case is a banking scandal with a more elusive quality.
In the first place, most insider frauds,
especially involving the rolling-over of fictitious assets, do
not normally last very long, and certainly not for two years.
In addition, no one has been able to
trace where most of the missing $21 million went, according to
the investigating officials.
And most of those the bank named as principal
defendants have disappeared from public view. These are Mr. Smith
and his wife, and L. Ben Lewis, a former operations manager at
a Wells Fargo branch in Beverly Hills, and his wife.
A fifth defendant, Sammie Marshall, a
top Maps official and a former bank employee, was reached by
telephone at his home in Los Angeles. He said, "Man, I'm
not talking to anyone."

Other Irregularities Indicated

Law enforcement officials say that
at this point in their investigation, the bank's estimate of
a $21 million loss seems fairly accurate, though they add that
there are indications of other irregularities, such as improper
loans, that could add to the total. In the suit, the bank is
seeking restitution and damages.
Wells Fargo, which has its headquarters
in San Francisco, has in the last decade expanded aggressively,
with much of the growth in southern California, and has pioneered
in instant computer bookkeeping. As a result, a tremendous volume
of transactions is processed  some 2.8 million a day in
December 1978, according to the bank's 1978 annual report.
It is impossible for banks with this
much business to verify every transaction instantly, so the computer
is programmed to look closely at only a limited range of transactions.

Cost of Controls Weighed

An insider with access to the system
and an awareness of its limits can commit a crime in the "window"
period, when the computer is not programmed to respond to missing
documentation. The larger the bank and the more it relies on
technology, the longer this window period, bank experts say.
Because there is a direct correlation
between the cost and the vigilance of internal controls, banks
may often decide, in effect, that the cost of preventing some
kinds of crime would exceed the possible loss from those crimes.
And the employees with the most computer
knowledge and access are often paid less then $25,000 a year.
Bankers say there have been relatively
few problems in this area in the past because most employees
are honest and banks have instituted adequate internal control
and surveillance systems.

'Anxious About Skilled Insider'

"Honesty is the glue that holds
the whole thing together," said William H. Bowen, president
and chief executive officer of Commercial National Bank in Little
Rock, Ark. He added, however: "We're all anxious about the
skilled insider who can take advantage of the delays and crevices
in the system. It's miraculous there's been so little abuse so
far, considering the billions of transactions."
Mr. Bowen emphasized the importance of
internal audit systems and controls as a means of preventing
fraud by insiders.
Banks are subject to an unusual number
of auditing tests. In the first and most important level, called
internal control, the work of employees in a department is reviewed
by their immediate superiors.
At the next level are the bank's internal
auditors, who do an independent review of the bank's personnel,
operations and accounts. A further review and audit is done by
the bank's outside accountants.

Final Review by Bank Regulators

The outside accountant for Wells Fargo
is the firm of Peat, Marwick, Mitchell & Co., which audits
six of the nation's top dozen banks.
The final review, a broader look at bank
policies and procedures, is provided by bank regulators 
in Wells Fargo's case, the Comptroller of the Currency. Donn
B. Parker, who has been a security consultant to Wells Fargo
and other banks in computer-related areas, said that Wells Fargo
had one of the more advanced internal audit and control systems
in the banking community.
Mr. Parker, who works for S.R.I. International,
near San Francisco, added, however, that he had some "suspicions
about the propriety" of Wells Fargo bank employees' having
business relationships with bank customers whose accounts they
handle. This "possible conflict of interest," according
to Mr. Parker and others, is a signal to auditors looking for
abuses by insiders.
Three Wells Fargo officials who handled
Maps-related accounts also had business relationships with Mr.
Smith, according to bank documents and bank officials. One was
Mr. Lewis, the former branch operations manager who is a principal
in several enterprises with Mr. Marshall, a top Maps official
and a former bank employee whose jobs included a position at
a Wells Fargo computer center. The third, Gene Kawakami, the
director of Maas, handled Maps business at the bank and was dismissed
earlier this week as manager of Wells Fargo's Miracle Mile branch.
Mr. Kawakami, who has disappeared from public view, was not named
in the lawsuit; Mr. Marshall and Mr. Lewis are defendants.

Laws and Codes of Ethics

Some of the business relationships
between Mr. Lewis and Mr. Smith were readily discernible. Indeed,
one entity that the bank has accused of misappropriating funds
is a corporation called Lewis and Smith Enterprises, which had
accounts at Wells Fargo and an office in Santa Monica with an
outdoor sign that prominently displayed its name.
Some outside relationships are prohibited
by law; for example, officials at savings and loan institutions,
but not commercial banks, are prohibited by Federal law from
certain business relationships with customers. Most banks, including
Wells Fargo, have have internal codes of ethics that may require
disclosure of outside interests and may also limit their extent.
A spokesman for Wells Fargo declined to talk about the extent
of disclosure of outside interests made by the three former officials.
Wells Fargo moved to dismiss Mr. Kawakami
this week only after Mr. Smith and others publicly raised questions
about his activities.
But questions had already been raised
in a 1980 case in Los Angeles Superior Court in which the bank
and Mr. Kawakami are defendants. Records in this case show that
the bank, through Mr. Kawakami, lent large sums of money to an
admitted gambler. The records also show that the gambler, who
has now petitioned for bankruptcy and owes $100,000 to Wells
Fargo, had financial dealings with Mr. Kawakami.
The bank also disclosed this week that
another branch manager, Joseph Mahfet Jr. of Wells Fargo's Hollywood
branch, had been temporarily relieved of his duties while the
bank authorities investigated $3.5 million in unsecured loans
for Tennessee real estate investments. Mr. Mahfet, according
to deed records in Memphis, was one of the investors.
A lawyer for Mr. Smith, Albert Sheppard,
has also raised questions about the bank's record keeping and
internal controls. Mr. Sheppard said earlier this week that Mr.
Kawakami had helped Mr. Smith convert to cash more than $500,000
in cashier's checks in a manner that contradicted bank and Federal
bookkeeping procedures.
Failure to fill out these forms, which
help bankers and law enforcement officials keep track of large
cash transactions, could subject the bank to civil or criminal
penalties under the Bank Secrecy Act of 1970.
Mr. Sheppard said that his client was
an innocent victim, and that he intended to vindicate his name.
He said that Mr. Smith had borrowed from the bank under what
he thought was a normal line of credit for more than $6 million,
arranged through Mr. Kawakami. Mr. Sheppard said that he would
soon be talking to Wells Fargo lawyers about these borrowings
and about Mr. Smith's assertion that he was unaware of any scheme
involving his account.